On Our Radar

Analysts: Gridlock Will Force Shutdown, Debt Ceiling Outlook Grim

It seems as though a government shutdown by midnight Tuesday is nearly unavoidable.

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The mounting pressure in Washington, D.C., over the nation’s fiscal worries weighs heavily on market analysts’ sentiment. Last week, many said it would be reasonable to expect U.S. Congressional leaders to come together on a continuing resolution aimed at keeping the government’s discretionary budgets operating past Oct. 1. But fewer than 24 hours before the deadline, those same analysts are now saying the shutdown looks almost certain.

In a note to clients Monday, the Potomac Research Group said it doesn’t see any signs of reconciliation on the horizon, and a government shutdown is highly likely for the first time in 17 years.

“We held out hope that a short-term continuing resolution would pass by midnight tonight, but that now looks far-fetched. None of the key players will blink anytime soon, so this could last for a while. For the markets, a state of exceptional uncertainty will persist for at least another month, possibly until late December,” the Washington-based consultancy wrote.

But Todd Schoenberger, managing partner at LandColt Capital in New York, said a shutdown will not happen -- but the fear is sending shock through the markets as stock-index futures point to triple-digit losses for the Dow Monday.

“We've been through too many of these end-of-world crises, only to hear about a resolution being delivered in the final hours. Sadly, Congress continues to discredit itself by playing these political games and negotiating via media interviews rather than face-to-face when it pushes the country to the brink,” Schoenberger said.

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If the government does indeed shut down, it will be credited in large part to deep divides on President Barack Obama’s Affordable Care Act. Congressional Republicans have tried repeatedly to work measures to alter or repeal it into a CR to fund the government until December, but Senate Democrats refuse to blink on passage. The Democratic-controlled Senate is set to gavel into session Monday afternoon and take up the House-passed CR. Though they’re likely to debate on the issue, the expectation is to again strip ObamaCare-delay language from the bill and punt it back to the House.

At that point, Speaker John Boehner faces a tough decision: Pass the “clean” CR to keep the government’s lights on, or again try to tie in some kind of negotiation surrounding ObamaCare. Sources told Fox News’ Chad Pergram on Saturday the top Republican on the hill still has one trick up his sleeve: Adding language that would lift an exemption precluding the president, lawmakers and other officials from participating in health-care exchanges.

Despite House Republicans’ best attempts, both the Senate and President Obama have repeatedly said they will strike down any legislation aimed at modifying ObamaCare.

If the shutdown becomes reality, the consequences the U.S. faces are uncertain.

“Much of the government spending that has a direct effect on the economy -- such as entitlement programs like Social Security and Medicare, as well as existing government contracts for constructions projects and purchases of weapons systems -- will not be affected by a shutdown. Government employees who are temporarily furloughed may cut back their spending, and business and consumer confidence may be adversely affected,” Nomura outlined in its note to clients.

In a note to clients Monday morning, Peter Boockvar, managing director and chief market analyst for The Lindsey Group, said previous government shutdowns have had little impact on U.S. equity markets, using the most recent as an example. In that case, a temporary fix ended the shutdown, and markets ended little changed from the first day to the last.

“Of course the circumstances are much different today in many ways but markets should assume that a deal will come sooner rather than later because the negative consequences get too large the longer this all lasts, particularly with the debt ceiling,” he wrote.

The bigger concern is a hit to the nation’s economy if and how long a shutdown happens. Michael Block, Chief Strategist at Rhino Trading Partners said in a note to clients Monday, he expects a shutdown to shave up to 1.4 percentage points off fourth-quarter gross domestic product.

“Perhaps more important, failure to reach a compromise here will damage the credibility of the U.S. political system even more acutely than recent shenanigans have already,” he wrote.

Next Congressional Battle

Sept. 30 is not the only deadline Investors and market participants are keeping their eyes focused on. A much bigger concern is the debt ceiling deadline on Oct. 17 -- on that day, the U.S. Treasury Department has said it will max out its “extraordinary measures” to fund the government’s financial obligations. At that point, conceivably, the United States will, for the first time in history, begin to default on its obligations, which could ignite massive backlash in financial markets and even spark ratings services to downgrade U.S sovereign debt. And that has market participants worried.

What’s making analysts nervous is the complete inability of Congressional leaders to work out a compromise on the CR. If lawmakers are unable to come together on even a funding proposal through the end of the year, does that bode well for the negotiations sure to come on increasing the nation’s debt ceiling?

“The consequences of the debt limit becoming binding are potentially much more severe. Arrears on some government obligations would probably be unavoidable, and Treasury officials have indicated that they see no clear way to avoid arrears on debt service obligations if the debt limit becomes truly binding,” Nomura wrote.

Block added, “Failure to pass (the debt ceiling resolution) would cause much bigger potential issues and not being able to resolve this issue first will not help investors’ confidence,” Block wrote. “Some pundits do think that a government shutdown will be good for markets because it will make Congress see how urgent and dire it is that they resolve the debt ceiling crisis.”